July 14, 2012

eBay Bill Me Later Service Could Be Risky, But Good For Profit

Experts are predicting considerable growth for eBay's Bill Me Later (BML) service, while warning that such growth could come with considerable risks due to the nature of the business.

According to Alistair Barr of Reuters, BML, which essentially offers credit to online shoppers, was purchased by the popular online auction website for approximately $1 billion in 2008. It accumulated more than $2 billion worth of loans in 2011 -- an increase of 64% from the previous year -- making it "one of eBay's fastest-growing businesses."

"BML is a potentially juicy new source of profit growth for eBay," Barr wrote in a Friday article. "The business also helps other parts of the company - for example, it could make PayPal more profitable by reducing funding costs, analysts say“¦ For now, BML is helping eBay make new waves in the online payment business."

Barr reports that, according to Javelin Strategy & Research statistics, BML was the third most popular alternative online payment service last year, behind Amazon.com's service and PayPal. It was used by consumers 14% of the time in 2011 versus 1% in 2010, and Morgan Stanley analyst Scott Devitt told Reuters that his firm expects the company's revenue to jump from less than $200 million in 2011 to over $500 million in 2015.

"This is one of the most prominent and fastest-growing businesses eBay has, and I think it becomes more prominent going forward," Gil Luria, an analyst at Wedbush Securities, told Barr. "BML is very important because it allows eBay to expand PayPal into a true financial product, as opposed to a purely transactional service."

One of the primary benefits of the service, is that it allows eBay to use billions of dollars of overseas money that earns little interest and cannot be returned to the US without the company taking a sizable tax hit, Reuters said. However, Luria also warned that BML's expansion could cause PayPal to take on more credit risk, and that if the service gets large enough and the growth of PayPal begins to slow, it could "pressure eBay's valuation."

Furthermore, BML could present eBay with major new credit risks, Barr said.

"Lending money, charging interest and waiting for the cash to be repaid is a riskier business than collecting fees for processing payments. That is especially true in the wake of the 2008 financial crisis, when defaults surged and some lenders went broke," he explained. "This can be seen in stock-market valuations. Visa, which lends no money, trades at more than 20 times 2012 estimated profit. American Express, which lends money, trades at about 13.5 times 2012 earnings, according to Thomson Reuters data."